The Good, Bad, and Investment Value of the Online Travel Space

The three big U.S. online travel companies have reported earnings, which for the most part were very solid. However, in digging deeper into the numbers, and taking valuation into consideration, which of Priceline.com (NASDAQ: PCLN  ) , Expedia (NASDAQ: EXPE  ) , and Orbitz Worldwide (NYSE: OWW  ) is presenting the most investment value?

The good
Priceline, Expedia, and Orbitz all reported earnings in February, and each had different areas of strength that led to large gains.

The industry's most valuable company, Priceline, continued its remarkable run of above-industry growth. Specifically, its revenue increased 29.4% year over year to $1.5 billion, which was easily better than analysts' expectations. Furthermore, the company's gross bookings -- a closely watched metric of user engagement -- rose 38.8% in the quarter, showing an acceleration of bookings growth, with 85% of total bookings coming from international markets.

Expedia's revenue growth of 18% didn't match Priceline's performance but was impressive nonetheless. In addition, its gross bookings rose 21% after growing just 15% in the prior quarter. This bookings growth was fueled by a 25% boost in hotel room nights purchased, which is a staple of Expedia's business.

Orbitz's numbers weren't nearly as impressive as either Priceline or Expedia, as its revenue grew just 4.2% and gross bookings displayed 4% growth. Clearly, these numbers aren't great, but what led to a near 30% stock jump is that expectations were very low following a poor third quarter. Also, 17.5% of its float was short, further showing the number of people betting against Orbitz, which then backfired when the quarter was better than investors feared.

The bad
In trying to determine the best investment in a particular industry, it is always wise to assess the weaknesses of each company and how it might affect that company's future.

Despite Priceline's growth, its guidance was weak. Its first quarter earnings-per-share midpoint guidance of $6.60 is far shy of the $7.21 consensus, as was its revenue growth outlook of 15%-25% versus projections of 27%. This guidance might signal that growth is becoming more difficult. Also, profitability has always been what separates Priceline from its peers, having an operating margin of 35.5% over the last 12 months. However, its operating margin fell 200 basis points year over year and ad spending of 36% outpaced growth. Combined, this adds to the notion that growth is becoming more difficult.

For Expedia, its growth and bookings have both accelerated, but this performance is in large part due to its acquisition of Trivago, a European travel site that is growing at more than 60% annually. Without Trivago, revenue growth would be just 14%, or about half of Priceline; some people consider this a concern.

While Priceline and Expedia are expected to grow double digits in 2014 and 2015, Orbitz's growth is far less consistent and aggressive. With that said, its 4% expected growth for 2014 is far below the rate of growth within the online travel industry, meaning it consistently loses market share year after year.

The investment value
As you can see, each company has its strong points but then also comes with investment concerns. Yet, the question remains of which single company in this space has the most upside while also presenting the most security.

Priceline is the obvious choice. But with it trading at 10 times sales, so much of its valuation is tied to the fact that it's highly profitable. This means that any margin weakness could drastically affect sentiment, much like Apple back in late 2012.

As for Orbitz, its fundamental performance is all over the place, wildly inconsistent to say the least. And with just 4% growth expected, Orbitz is rapidly approaching a place in its existence where growth becomes no more. At this point, the best investors can hope for is that either Priceline or Expedia acquire Orbitz and are willing to spend money to grow its name.

This leaves Expedia, a company with solid growth; and at just two times sales, it is very cheap. Not to mention, while Priceline struggles with margin pressure, Expedia is seeing its margins rise, which could create very large gains if such improvements are sustainable.

Final thoughts
Essentially, the battle of the best investment really comes down to the two leaders, Priceline and Expedia. Then, the disconnect is what makes Expedia the best choice.

Priceline has annual revenue of $6.8 billion; Expedia reported $4.4 billion last year. Therefore, Priceline is about 50% larger than Expedia, yet its market cap is nearly seven times larger! Hence, there's a huge gap between the valuation and actual sizes of these companies, and a larger reason is the superior efficiency of Priceline relative to its peers.

However, if Priceline's margins are under pressure, and Expedia is improving, then this insinuates further upside, possibly very large gains, for Expedia, making it the best of the bunch.

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